Government budget proposal for 2010

Finland’s export-led economy has fallen into a deep slump on account of the global recession. Consequences are seen in the rise of unemployment, decline in tax revenues and ensuing difficulties in public finances. The Government budget proposal for 2010 focuses on measures promoting employment and preventing unemployment, training of the laid off or dismissed people, and strengthening of the local government financial base to secure basic services.

Substancial investments to secure municipal services

Local government finances have started to deteriorate very quickly in the course of this year, particularly as a result of declined corporate income tax revenues. It is estimated that tax revenues of municipalities will slightly decline in 2010.

Through the decisions taken in the budget session and at the discussion on government spending limits, the Government will significantly facilitate the threatened local government finances. There is a risk of a severe deficit between municipal revenues and estimated expenses unless the state and municipalities take measures to balance the situation. The Government will participate in repairing the deficit by granting a total of some EUR 720 million in 2009 and 2010.

Decision on the abolishment of the employer's national pension contribution was made already in connection with the spending limits decision. In consequence, local government finances will gain a EUR 250 million increase, corresponding to 6,000 man-years. Increasing the corporate income tax apportionments to local government authorities will strengthen the financial basis in municipalities by nearly EUR 400 million in 2009-2011. Raising the thresholds for real estate taxes collected by local government will entail a minimum of EUR 50 million increase in local government finances.

The raise of the maximum real estate tax rate will bring municipalities an extra EUR 900 million in tax revenues without raising the municipal income tax rate. The Hetemäki tax reform committee is looking into options to strengthen municipal income tax base in the long run.

The Government budget session decided on a EUR 30 million extra increase in government transfers and grants. It also decided on a EUR 58.5 million extra appropriation to municipalities for the repair of health centres, residential homes for older people, children’s day-care centres and schools affected by mould after such renovations have been carried out. EUR 5 million will be granted for IT investments to develop municipal services.

Steps will be taken to develop the system of central government transfers to local government. Transfers currently paid from different administrative branches will be combined into a single subsidy for the provision of basic public services. At the same time transfers for pre-school and basic education will no longer be based on pupil numbers but on the population number in each age band, and the transfer percentage rate will be harmonised.

Exceptionally scarcely populated municipalities and island municipalities will receive a total of EUR 30 million within the central government transfer scheme. Increase in the discretionary government transfers, incorporated into the composite budgetary item for central government transfers, is EUR 20 million which is EUR 5 million more that in 2009.

New jobs by earlier implementation of investments and acquisitions

The Government has decided to allocate funding to the early implementation of investments and other measures aiming at rapid employment effects at low cost. The speedy implementation will launch projects worth a total of EUR 1.7 billion, which includes the inputs of municipalities and the private sector. Special emphasis will be placed on measures fostering economic growth in the long-term by boosting innovation, utilising IT and promoting environmental and climate aspects. Measures will be targeted especially at sectors undergoing difficult problems.

Measures are divided into the second supplementary budget proposal for 2009 and the budget proposal for 2010. The expenditure of the package of early investments creating more than 10,000 man-years is about EUR 330 million distributed in several budget years. The decided measures are computed to amount to EUR 65 million in 2009 and EUR 80 million in 2010.

Particular attention to finding jobs for young people and recent graduates

The budget proposal includes a package of measures that aim at quickly and efficiently supporting employment and finding jobs. Training that promotes employment will be increased in the current, exceptionally difficult employment situation. At the same time, prerequisites for economic growth are supported. The main focus will be on preventing long-term unemployment and marginalisation of young people.

Measures are targeted at finding jobs for young people and recent graduates, providing education for immigrants, and improving the skills of the adult population by providing additional vocational education, retraining and upgrading of their qualifications.

Further employment-oriented measures decided on at the budget session takes account of the demand for labour force which is on the increase in various fields due to, for example, the stimulus measures implemented and other trends in sight. The decided measures are computed to amount to EUR 5 million in 2009 and EUR 70 million in 2010. As a result, intake of students will rise by 3,050 and the number of people provided other employment measures or training by over 4,700.

To alleviate youth unemployment, additional funding will be allocated to finding jobs for young people and increasing initial vocational training. The additional input in young people and recent graduates amounts to a total of EUR 50 million.

To improve the skills of the adult population and raise adult employment, more vocational further education and training will be provided both in educational institutions and in the form of apprenticeship training. Apprenticeship-type continuing professional education will also be offered to graduates of higher education.

A functional model for managing structural change has been introduced in the Jyväskylä region to implement measures to employ, in particular, experts with higher education qualifications and to increase entrepreneurship. The aim is to launch the model at nation-wide level.

People offered various employment measures are estimated to amount to an average of 89,500 in 2010. The activation rate of all unemployed job seekers and those within labour administration measures is around 21% in 2010. The appropriations for the administrative branch of the Ministry of Education amount to some EUR 26 million to increase intake of students by a total of 5,200 in 2010. The decision takes account of the increases introduced in student places already in the first supplementary budget for 2009.

Inputs in outreach youth work will be nearly doubled to EUR 4.65 million.

A reform will be introduced in the financial aid for adult students as of 1 August 2010. The aim is to rationalise the adult education system of the employed labour force by removing the work experience basis for the aid. An employment history of eight years would entitle an adult student to receive a total of 18 months of financial aid once during his/her career. Consequently, a EUR 3.2 million additional appropriation is allocated to financial aid for adult students in the 2010 budget proposal. On an annual level, the reform’s effects on central government transfers are estimated to amount to EUR 6 million.

A total of EUR 4.1 million is added in the second supplementary budget for 2009 and the 2010 budget proposal to employ police training graduates. Additional grants are targeted, in particular, to the investigation relating to the asylum procedure.

Funding for prosecutors will rise by some EUR 1 million as a result of the Win Capita case, in particular. Prison services will be secured by a EUR 4 million increase.

Reform of unemployment benefits and training benefits for the unemployed

Unemployment benefits and training benefits for unemployed persons will be reformed as of the beginning of 2010. The reforms will increase the expenditure by EUR 104 million, with the share of central government coming close to EUR 25 million. An activation allowance increased by nearly EUR 100 will also be paid, during activation measures, to persons in receipt of labour market support and basic allowance. The job alternation scheme will be made a permanent arrangement.

The appropriations for rehabilitative work will increase by EUR 8.5 million, of which EUR 2.1 million is allocated to removing the upper age limit. Rehabilitative work programmes will be expanded by removing the upper age limit for drawing up a compulsory activation plan and for obligatory participation in rehabilitative work from the beginning of 2010. This will have the effect of increasing government expenditure by a total of EUR 3.1 million.

Development of basic education to continue

The programme on the quality enhancement in basic education (POP) will continue and receive a total of EUR 62 million in 2010. EUR 30 million of this will be allocated to reduce group sizes (EUR 16 million in 2009). Special needs education will be further strengthened. The cost impact will be EUR 15 million in 2010. EUR 8 million will be allocated to support after-school club activities.

Municipalities will be able to decide on the quality requirements in basic education themselves. A programme ensuring professional competence in education (OSAAVA) will be launched by means of a grant of EUR 8 million.

University reform to continue

The 2010 budget proposal takes account of the new status of universities as independent institutions or foundations governed by public law whose funding from central government is determined by the extent, quality and impact of their operation and by national education and science policy objectives. The Government proposes that a total of EUR 150 million be allocated to the capitalization of the Aalto University and the Tampere University of Technology foundations.

Changes relating to the university reform are proposed also in connection with the second supplementary budget for 2009. Decisions are to be made on university real properties and the second instalment of state grant to be allocated for ensuring the liquidity and working capital of universities. A separate Government proposal will be submitted on university taxation regulations. The suspension of the new type of universities’ obligation to pay unemployment insurance contributions will be investigated.

Additional appropriations for culture

Appropriations for the arts and culture will be raised by over EUR 51 million. The EUR 10.8 million increase in central government transfers will raise the grant to theatres and orchestras to EUR 79 million and the EUR 7.0 million increase will lift the transfers to museums to EUR 38 million.

Retained earnings of the National Lottery of Finland is estimated at EUR 463 million, approximately EUR 32 million more than in 2009. 61% of all state appropriations for sports, youth work and culture, including the central government transfers to culture, comes from the retained earnings of the National Lottery.

Reforms of social security benefits

National pensions and other benefits linked to the national pension index, such as the basic unemployment allowance, labour market support and maintenance allowance, will not be reduced in 2010, despite the anticipated reduction in consumer prices. As a result, the government expenditure will increase by EUR 33 million. It is proposed that steps to remove the distinction between outpatient and institutional care be continued so that recipients of disability benefits in institutional care should be paid pensioners’ care allowance as of 1 January 2010.

Treatment given by oral hygienists will be compensated under the health insurance scheme.

Students’ entitlement to sickness allowance will be improved.

In keeping with the Government Programme, the length of paternity leave will be extended by two weeks. Partial home care allowance will be raised by EUR 20, and eligibility for this benefit will be extended to also apply to the self-employed. This is estimated to increase expenditure by EUR 3.1 million, of which the state contributes EUR 1.55 million.

The period of annual leave for farmers will be extended by one day, which involves an increase of EUR 4 million to government expenditure. A holiday and stand-in scheme will be started for fur farmers in 2010, enabling them to take an annual leave of 14 days plus an additional leave against payment. EUR 2.6 million is set aside for this purpose. An experiment with temporary help in reindeer husbandry will start at the beginning of 2010, and an appropriation of EUR 0.3 million is proposed for it.

Vaccinations

The necessary influenza vaccines will be purchased.

Pneumococcal vaccine will be added to the national vaccination programme. This vaccine prevents, for instance, inflammation of the ear in children and pneumonia. Furthermore, it reduces considerably pneumococcal infection in older people. The cost of this addition to the vaccination programme will be EUR 6 million in 2010.

Veterans

The Government proposes a EUR 50 monthly veteran allowance to be added to the higher and special payment categories of veterans’ war pensions. In addition, veterans’ rehabilitation expenditure financed through Finland’s Slot Machine Association RAY is to be increased by EUR 1.8 million.

Appropriations for development cooperation to increase in 2010

Appropriations allocated for official development assistance (ODA) are in the 2010 budget proposal about EUR 50 million more than in the 2009 budget. The ratio of ODA to GDP will stand at 0.55% which exceeds the objective of 0.51% in 2010. The ODA appropriations will increase by some EUR 4 million in 2010, EUR 60 million less than planned when decisions on spending limits were made.

Immigration expenses on the increase

Contributions paid for municipalities for the reception of refugees will be raised for the first time in 16 years.

It is proposed that expenditure on the reception of asylum seekers be increased by EUR 65.5 million in 2009 and by EUR 76 million in 2010. Inputs in the asylum seeking processes of the Police, Finnish Immigration Service and administrative courts will speed up the deliberation of asylum applications.

Letters of intent drafted for the municipalities in greater Helsinki area can now be completed for the integration of immigrants and finding them jobs. EUR 2 million will be reserved for these purposes.

State support to construction jobs

Housing construction has been maintained to alleviate the slowdown in the construction sector. Budget authority earmarked for state-subsidised housing production has been increased in 2009 to EUR 1,170 million and will still be raised by EUR 500 million in the supplementary budget. Authority to grant construction start-up assistance will also be increased by EUR 32 million to meet the growing production.

State-subsidised housing production can even rise by 12,000 new homes this year. The employment effects of new housing construction started under this budget authority will mainly be felt in 2010.

The interest subsidy authority will be maintained at an elevated level also in 2010 to support employment.

Cyclical renovation grants to housing companies and rental housing companies will be continued in current terms between 1 January and 31 March 2010 to avoid work from piling up and to ensure quality. EUR 50 million is set aside for this purpose. Appropriations will also be granted between 1 April and 31 December 2010 to projects improving the energy efficiency of buildings or converting them for the use of renewable energy sources. A total of EUR 37 million will be allocated for such purposes.

The budget will also provide funding for the nation-wide project to combat moisture and mildew in buildings. Workers dismissed or laid off from the construction sector will be offered opportunities to retraining and upgrading of qualifications to become specialists in renovation and repair of buildings.

Construction of the Seinäjoki-Oulu rail link to continue

The Government budget session decided that an appropriation of EUR 40 million will be used to ensure that the construction of the Seinäjoki-Oulu rail section continues.

It was also decided that the life-cycle projects of adding a second track on the Kokkola-Ylivieska rail section and of constructing the E18 Koskenkylä-Kotka motorway be launched.

In 2010, the total volume of new transport infrastructure projects will amount to a record level of EUR 530 million.

The planning work for the Main Road 8 Sepänkylä by-pass and the E18 Hamina by-pass will continue in 2010 and the construction work will begin in accordance with the Government Transport Policy Report in 2011.

In order to ensure domestic air transport services, airport and air navigation charges will be lower from 1 September 2009 until the end of 2011.

The Government decided that the renewal of two car ferries will start in 2010, earlier than originally planned.

The Government prepares to plan and implement the transport projects related to Kolari-Pajala and Sokli mining areas. The work will be carried out in a manner to be specified after consultation with the mining companies.

Improvement of broadband connections to be accelerated

A total of EUR 12.5 million will be reserved for the national broadband project to support the construction of telecommunications connections in sparsely populated areas. It is the Government’s aim that nearly all citizens will have access to a high-speed broadband connection. Construction of telecommunications connections is an efficient way to create jobs. The broadband project is also a means to accelerate the development of electronic services and to ensure that everyone across Finland has access to information society services.

Operating conditions for agriculture and forestry to be ensured

In the second supplementary budget for 2009, funding under the Act on the Financing of Sustainable Forestry (KEMERA) was raised by EUR 12 million. In 2010, this funding will be further increased as set down in the objectives of Finland’s National Forest Programme to meet, among other things, the need for more financial support for the harvesting of energy wood.

The amount of EUR 30.9 million agreed in the Government Programme for the budget of 2010 is transferred to the Development Fund of Agriculture and Forestry (Makera). In addition to this, EUR 8 million are transferred in the second supplementary budget for 2009. The transfers of these appropriations ensure sufficient funding for the agricultural investment aid in 2010.

The Government takes action in view of the weakening of the economic situation in the agriculture sector. The authority to pay national aid may be used up to EUR 40 million as additional national aid included in the Commission report on the milk sector. The decisions on the allocation of the payments will be made in the negotiations on national aid after the Commission has finalised the necessary legal instruments.

The Government prepares measures to improve the liquidity of farms that are faced with economic difficulties. The proposals will be submitted to the Government by the end of October.

Investments in nature protection to continue

The Government will invest in the establishment of new nature protection areas and the provision of services in national parks. In 2010, funding will be nearly tripled for the Metso project, a key protection programme based on landowners’ initiatives to safeguard biological diversity in the forests of southern Finland.

Further funding for the upkeep of national parks creates jobs in areas of low employment, for example, in the national park of Pallas-Yllästunturi. The Government prepares to participate in the construction of the nature and cultural centre of the Pyhä-Luosto national park.

Government to secure future jobs

The Government considers it important that measures be taken to secure the operating conditions of the shipbuilding industry and its competitiveness. The Ministry of Employment and the Economy will set up a broad-based working group to put forward proposals for necessary action. The Government is committed to the continuation of innovation support. It will make decisions based on the working group's proposal by the end of 2009.

The Border Guard will be granted a procurement authority of EUR 57 million for the purpose of acquiring a large patrol boat with oil spill prevention and response capabilities. The procurement authority for extending the renovation of the Rauma class missile boats (4) of the Defence Forces will be increased by EUR 10 million for the period 2010-2011. In 2010, the share of payment of the expenses is EUR 5 million.

Appropriations allocated for employment, training and special measures will be raised by some EUR 83 million in 2010, totalling approximately EUR 561 million. In addition, employment and training measures are to be allocated ESF-earmarked funding.

The Government takes steps to promote the mitigation of climate change by significantly raising the amount of support for renewable energy: the Government budget session decided on a total of EUR 74.1 million support, of which EUR 10 million is available this year. The effectiveness of the support will be strengthened by a new form of support, to be introduced next year, for electricity generated using wind power and biogas.

To secure a high standard of competence and skills, technology and innovation policies and businesses' internationalisation projects will be provided with a record-high support of EUR 870.8 million. This accounts for an increase of EUR 63.4 million in relation to the ordinary budget of 2009.

The Finnish Funding Agency for Technology and Innovation TEKES, which primarily provides support for businesses, will see an increase of EUR 54.5 million in its authority to grant funding. In addition, the authority to grant funding to businesses this year will be raised by EUR 29 million.

During the recession, public funding has also had an increasingly important role in the promotion of exports. Support for the internationalisation projects of businesses will be raised by some EUR 6 million. Further resources will be targeted at areas such as wood products, wood construction and environmental technology, in particular.

The use of EU programme resources will be brought forward: 20 per cent of authorisations for 2012, totalling EUR 87 million, will already be employed next year. A total of EUR 534.9 million of structural fund authorisations supporting the regions will be made available for various projects next year. At the same time, the ’front-loaded’ use of resources allows for a temporary relief of municipalities’ contribution from 25 per cent to 15 per cent. Municipalities must, however, compensate for the relief at the end of the programming period.

Changes to taxation proposed by the Government

The Government has agreed that the value added tax rates will be amended as of 1 July 2010. The overall value added tax will be raised from 22% to 23%, the VAT on foodstuff and feed from 12% to 13% and the VAT on, for example, books, pharmaceuticals, cultural and sports services and public transport from 8% to 9%. At the same time, the VAT for restaurants will decline from 22% to 13%, the same level as foodstuff bought from retail outlets.

On an annual basis, the value added tax rate change will bring EUR 426 million as state revenues. In 2010, the VAT revenue increase will amount to about EUR 133 million.

The taxes on the lowest income groups will be reduced by increasing the basic deduction in municipal taxation from EUR 1,480 to EUR 2,200. For example, the annual disposable income of those who receive the minimum sickness daily allowance or basic unemployment allowance will increase by an average of almost EUR 180.

In addition, tax rates will be revised to reflect rising income levels. These revisions are also aimed at preventing an increase in taxes on labour in 2010, given the expected rises in wage earner contributions. The taxation of pensions will be eased in keeping with the Government Programme so that tax rates for pension income will be no higher than the corresponding tax rate for earned income. All told, these changes are expected to lower tax revenue by some EUR 1,060 million. The local government share of EUR 375 million will be offset by increasing central government transfers.

The unemployment insurance contribution will be raised by 0.2 percentage points. In 2010, the raise will be fully compensated to employees. The state will ensure the liquidity of the Unemployment Insurance Fund in all circumstances.

To help companies facing financial difficulties, the Government proposes that the penalty interest rate on delinquent taxes be lowered to 7% next year. This will allow companies experiencing temporary cash flow problems to make the necessary arrangements so that they can pay off their taxes at a more reasonable interest rate. The current penalty interest rate on unpaid taxes is 11.5%, and without the proposed change it is expected to drop to 8%.

The taxation of long-term savings will be reformed so that the tax schemes involving voluntary pension insurances will be extended to long-term savings contracts made in keeping with an act under preparation on bound long-term savings.

No tax will be levied for an employer-subsidised commuter ticket worth up to EUR 200 or for a ticket worth EUR 600-3,400. The taxable value for any ticket between EUR 600-3,400 will be EUR 400.

The profits from the conveyance of arable land to professional agricultural entrepreneurs are exempted from tax in 2009-2010, which reduces the capital income tax revenue by about EUR 10 million in 2010.

For the purpose of ensuring competitiveness of the Finnish shipping sector the tonnage tax act will be amended so that in 2009-2011 the shipping companies will have the right to opt for tonnage taxation for a period of 10 years. This will decline the amount accrued from corporate tax paid by the shipping companies. The decline will be compensated by the tax payable on the basis of the tonnage tax acts. It will, however, be relatively small. Revenues from the corporate tax are expected to decline by around EUR 10 million.

Taxes on cigarettes and other tobacco products will be raised by around 5% as from the beginning of 2010. The tax on loose tobacco, however, will be raised by 15%. Tax revenues will rise by some EUR 20 million. The excise duty on sweets will be introduced towards the end of 2010 and the excise duty on soft drinks will be raised. These changes will increase annual tax revenues by EUR 100 million.

Declining revenue estimates

This year’s tax revenue estimates, covering two supplementary budgets allowances, are nearly EUR 5.8 billion lower than the final central government accounts for 2008. Tax receipts are estimated to drop by another EUR 0.5 billion in 2010. Tax revenue is expected to decrease by 1.4% in 2010. Miscellaneous revenue is anticipated to grow by about 5% while interest income and profit entered as income are expected to drop by a fifth.

The economic recession has significantly reduced receipts from cyclically sensitive tax sources such as corporate and capital income taxes this year. Business profitability will drop sharply in 2009 and household capital income revenue is calculated to fall by a quarter. Moreover, central government tax accrual from corporate income will be smaller this year because the government’s share of corporate tax revenues was reduced by 10.8 percentage points as a temporary measure between 2009 and 2011 for the benefit of local government and the parishes. Next year, corporate tax accrual is estimated to grow whereas receipts from earned income and VAT will continue to fall owing to declining income tax bases and tax decisions.

Payroll taxes and household consumption expenditure are expected to grow by 1% next year and capital income by 1½% whereas tax revenue from earned income, capital income and VAT are estimated to fall by about 4%. Tax receipts from earned income and capital income will decrease because there are impediments to making changes in income tax rates and due to increases in wage earners’ contributions because they are tax deductible.

Key budget indicators

New measures need to be introduced to sustain employment, manage unemployment and ease local government finances. The Government will reallocate some EUR 230 million from key expenditure to these areas, which are now even more important. Reallocation of resources will take place in all administrative branches. The operating expenses of government agencies will be cut by EUR 56 million. The liquidity requirement of the National Pension Fund will be lowered from 5% to 3.5%, which reduces central government expenditure by EUR 38 million. Defence materiel procurements will be cut by EUR 18 million. The plans for building a parking area for lorries will be abandoned.

On-budget expenditure will grow by nearly EUR 1 billion in 2010 relative to the 2009 ordinary budget and by approximately EUR 600 million in relation to the sum budgeted for 2009.

The second supplementary budget for 2009 is EUR 2.2 billion in deficit and the budget proposal for 2010 is EUR 13.0 billion in deficit. The deficits will be financed by engaging in more debt. Central government debt is estimated to total around EUR 78 billion by the end of 2010, which calculates at 44% of GDP. Interest expenses are computed to amount to EUR 1.9 billion in 2009 and EUR 2.1 billion in 2010. With the debt stock mounting and the general interest rate levels returning closer to the long-term average, central government debt servicing can be expected to increase considerable in the next few years.

Economy expected to start to slow recovery in 2010

Triggered by falling exports last autumn, the vicious cycle of economic recession continued to deepen in Finland during the winter. Economic activity has slowed even further over the summer, although the fall in GDP is no longer accelerating. The pace of decline in the global economy has also slowed, and the uncertainties in the financial market eased.

As a result of the sharp decline in output during the first half of 2009, the total output is expected to fall this year by around 6% on an annual basis. The GDP is expected to rise by 0.5% in 2010 if the economies of Finland’s main trading partners recover as expected.

Despite pay increases and tax cuts, the combined disposable income of all households will not rise this year. Of the total number, however, most households will have increased disposable income this year.

Households have considerably increased saving and their consumption will decline by almost 3% this year. Purchasing power is expected to turn to a slight increase next year. However, consumption is estimated to continue its slow fall as unemployment grows. Consumer prices are expected to rise by 0.1% in 2009 and 1% in 2010.

Jobs will be lost as a result of declined exports and domestic demand. In 2009, the number of employed people will decrease by over 90,000 and the employment rate will lower by almost 3 percentage points to less than 68%. In 2010 the number of employed people will continue to decline by 64,000 and the employment rate to hit 66%. In 2009, the average unemployment rate is 9% and is projected to climb to 10½% in 2010.